Reform City or we face second crunch, warns pension expert

The seeds of the next credit crunch are being sown on Wall Street and in London's Square Mile, while politicians and bankers focus on short-term measures to shore up the financial system, according to a leading pensions adviser.

A second boom and bust is only a few years away if traders, fund managers and others continue to rely on commissions and bonuses from short-term buying and selling of stocks, and not expanding their portfolios, according to the BT pension fund Hermes.

Colin Melvin, the head of the fund's advisory arm, said that without fundamental reforms the "transaction culture" in the City would return once the worst of the recession was over.

Hermes claims to be one of the few pension funds to have questioned Britain's bankers over their exposure to credit derivatives and other risky investments in the run-up to the credit crunch. Melvin said he had campaigned for several years to persuade investors that their interests were not served by their agents and advisers in the City. But the boom in share prices and property values, which was fuelled by a frenzy of transactions, had drowned out his protests.

He called for pension funds to rebel against payments to fund managers and investment banks for short-term gains, as a key defence against another boom based on falsely inflated asset prices.

"Pension funds are major clients of the finance industry and the owners of corporate Britain. They need to recognise they were part of the problem because it was their support or indifference that allowed banks and other companies to take excessive risks," he said.

"Now we have a situation where the stimulus packages on both sides of the Atlantic are leaving the current practices in place at a time when they desperately need to change," he added.

The UK Shareholders Association, which represents thousands of small investors, said it wanted to curb "the corrosive culture of excessive executive pay and boardroom greed, particularly within the financial services industry".